68th Annual Tax Conference
(2016)
Calgary, AB
OTHER SPECIALIST AREAS
Selected Issues
for Private
Corporations
Grace Chow, CPA, CA, TEP,
Cadesky Tax, Toronto
Disclaimer:
This material is for educational purposes only and is not
intended to be advice on any particular matter. No one
should act on the basis of any matter contained in these
materials without considering appropriate professional
advice. The presenters expressly disclaim all liability in
respect of anything done or omitted to be done wholly
or partly in reliance upon the contents of these materials.
Kenneth Keung, CA, CPA (CO, USA), CFP, TEP, LLB, MTax
Moodys Gartner Tax Law LLP, Calgary
Selected Issues
for Private Corporations
Selected Issues
●
●
●
●
2
Changes to Small Business Deduction (SBD) regime
New section 55 rules – some highlights
New eligible capital property (ECP) regime
Impact of Canada’s new high tax climate for individuals
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Historical SBD Planning
● Small business deduction (SBD) multiplication planning
has been a mainstay in the many advisors’ tool belt.
● Overly simplified, planning involved splitting profits into
multiple corporations not associated with each other.
● Such non-associated corporations could be a mixture of
bona fide stand-alone businesses; often, however, the
multiple corporations is in substance one business.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Historical SBD Planning – Example 1
Business Limit:
$500,000
Wife
Husband
Corp.
Corp.
Active Business
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68th Annual Tax Conference
Services
Business Limit:
$500,000
Bookkeeping “business”
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Historical SBD Planning – Example 2
Mr. Apple
Mr. Banana
Apple
Co.
Banana
Co.
Service
Service
Partnership
5
Active Business
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New Rules Overview
● Proposed rules initially carve out three types of income
of a CCPC from being eligible for SBD:
A. Clause A carve out active business income (ABI) earned
by a CCPC from certain partnerships;
B. Clause B carves out ABI earned by a CCPC from certain
corporations (generally, exception exists for associated
corporations); and
C. Clause C carves out ABI earned by a CCPC from a nonCCPC or a CCPC that makes an election under
subsection 256(2) to not be associated with the recipient
CCPC.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New Rules Overview
● Income caught by Clause A or B excluded from SBD
unless brought back into SBD eligibility as either:
 Specified partnership income (SPI) –
 if an actual member, based on its specified partnership
business limit (SPBL), i.e. pro-ration of $500,000;
 if a “designated” member, will require an assignment of
SPBL from a member; OR
 Specified corporate income (SCI) –
 Requires an assignment of business limit (BL) by the
recipient of service or property.
● Income caught by Clause C cannot be brought back in.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Simplified SPI flowchart (CCPC earning phsp income or providing services/property to pshp)
Is the CCPC a member of
the partnership?
No
Does the CCPC (directly or indirectly, in any manner whatever)
provide services/property to the partnership?
No
Yes
Does one of the shareholders of the CCPC holds a direct or
indirect interest in the partnership?
No
Does the CCPC not deal at arm’s length with a person that holds a
direct or indirect interest in the partnership?
Yes
No
Clause
125(1)(a)(i)(A)
carve-out does not
apply.
Yes
Yes
Does the CCPC earn all or substantially all of its active business
income from providing services/property to:
I.
Arm’s length persons, or
II.
Partnerships (other the particular partnership) with which the
CCPC deals at arm’s length, other than a partnership in which a
non-arm’s length person holds a direct or indirect interest.
Yes
No
The CCPC is a designated member of the partnership.
All of the following income of the CCPC is carved-out per clause 125(1)(a)(i)(A):
I.
Share of income of the partnership;
II.
Income from provision (directly or indirectly, in any manner whatever) of services/property to the partnership;
III.
Any amount included under subsections 34.2(2), (3) and (12).
Is this a back-to-back service/property provision arrangement [paragraph (A)(c) of the SPI definition]?
No
Yes
Cannot include
any carved-out
income in
paragraph
125(1)(a).
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68th Annual Tax Conference
Is the CCPC a member or designated member of the
partnership?
Member
The CCPC may include carved-out income as SPI in paragraph
125(1)(a) to the extent of its SPBL, determined as follows:
CCPC’s % interest in the partnership active business income x
$500,000 (pro-rated for short partnership year), minus any SPBL
assigned to another.
Designated member
The CCPC may include carved-out income as SPI in
paragraph 125(1)(a) to the extent of any SPBL
assigned to it by a person who holds a direct or
indirect interest in the partnership and who does not
deal at arm’s length with the CCPC.
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Simplified SCI flowchart (CCPC providing services/property to a private corporation)
Does the CCPC (directly or indirectly, in any manner whatever) provide services/property to a private corporation that is not
associated [subject to conditions under subsection 125(10)]?
No
Yes
No
Does the CCPC, a shareholder of the CCPC or a person who does not deal at arm’s length with either the CCPC or a
shareholder of the CCPC hold a direct or indirect interest in the private corporation?
Clause
125(1)(a)(i)(B)
carve-out does
not apply.
Yes
Does the CCPC earn all or substantially all of its active business income from providing services/property to:
(I)
(II)
Arm’s length persons (other than the private corporation), or
Partnerships with which the CCPC deals at arm’s length, other than a partnership in which a non-arm’s length person
holds a direct or indirect interest.
Yes
No
All of the CCPC’s income from providing services/property to the private corporation is carved-out per clause 125(1)(a)(i)(B)
Does the CCPC provide services/property directly to the private corporation?
No
Yes
Does the recipient private corporation have business limit determined under subsections
125(2), (3) or (4)?
No
CCPC Cannot
include any
carved-out
income in
paragraph
125(1)(a).
Yes
The CCPC may include carved-out income as SCI in paragraph 125(1)(a) equal to least of:
a)
b)
c)
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CCPC’s income from providing services/property directly to the private corporation, less any income from a back-to-back
service/property provision arrangement [formula in paragraph 125(3.2)(c)];
The amount of business limit assigned by the private corporation to the CCPC;
An amount the Minister determines to be reasonable in the circumstances [paragraph (b) of definition of SCI].
68th Annual Tax Conference
Several components and structure of this
flow-chart is taken from the SCI flowchart
contained in the paper: David G.
Thompson,
“Small
business
deductions/multiplication/dealing
with
PCs”, 2016 British Columbia Tax
Conference (Canadian Tax Foundation).
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Partnership
Mr. Apple
Any %
Apple
Co.
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68th Annual Tax Conference
Mr. Banana
Any %
Partnership
Services
(any amount)
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Partnership
● AppleCo is a designated member (no de minimis and no
arm’s-length income test).
● Clause A carve-out applies to AppleCo’s service income.
● Mr. Apple & Mr. Banana share pro-rated $500K SPBL.
● If Mr. Apple does not deal at arm’s length with AppleCo
(either control or in fact), Mr. Apple may assign his
portion of SPBL to AppleCo so that AppleCo may bring
service income back into SBD entitlement as SPI.
● Mr. Banana may also assign, if he does not deal at arm’s
length with AppleCo.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Partnership
Brother
>50%
> 10% of Apple Co.'s ABI
from non-arm’s length
customers
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68th Annual Tax Conference
Mr. Apple
Brother
Co.
> 50%
Any%
Apple
Co.
Partnership
Services
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Partnership
● AppleCo is designated member of partnership because:
 AppleCo not deal at arm’s length with a person (BrotherCo)
holding an interest in Partnership, and
 Not all or substantially all of AppleCo’s ABI derived from
providing services/property to arm’s length person.
13
● AppleCo’s service income subject to Clause A carve-out.
● BrotherCo’s income from Partnership (whether allocated
partnership income or fee income from Partnership) also
subject to Clause A carve-out.
● BrotherCo may choose to assign all or a portion of its
SPBL to AppleCo or keep SPBL for its own use.
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Private Corp
Either Apple Co., any
shareholder of Apple Co.
or a non-arm’s length
person
Mr. Apple
> 10% of Apple
Co.'s ABI from
non-arm’s length
customers
14
Any %
Any %
Apple
Co.
Private
Corp.
68th Annual Tax Conference
Services
Not associated
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Private Corp
● AppleCo’s income from Private Corp carved-out under
Clause B because:
 AppleCo not associated with Private Corp;
 AppleCo/one of its shareholders/a person not dealing with
AppleCo or one of its shareholders hold interest in Private
Corp; and
 Not all or substantially all of AppleCo’s ABI derived from
providing services/property to arm’s length persons.
● AppleCo may claim SBD on those income only if the
income is SCI  requires Private Corp to assign its BL
to AppleCo.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Private Corp
● Unlike SPBL assignment (inherently limited by
assignor’s % interest in partnership), BL assignment by
recipient corporation to provider corporation is limited.
● Maximum assignment is the provider’s “income” from
the provision of services or property to the recipient.
● “Income” – gross or net?
● Contextual interpretation support ‘net’: SBD in
subsection 125(1) is calculated on profit.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Private Corp
Numeric Illustration: (Cont’d from previous)
Apple Co.
Net income from
other customers
Net income from
Private Corp.
Total Net income
17
$300,000
Services
Revenue
$500,000
Related expenses ($300,000)
Net income
$200,000
related to services
Private
Corp.
Net income before
paying Apple Co.
$900,000
Payment to Apple Co.
($500,000)
Net income
$400,000
($200,000)
$500,000
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Earning Income From Private Corp
● If Private Corp does not assign any of its $500K BL to
AppleCo:
 Private Corp may claim SBD on $400,000 of ABI.
 AppleCo may claim SBD on $300,000 of ABI
● Private Corp may choose to assign up to $200,000 of its
BL to AppleCo. If it assigns $100,000:
 Private Corp may still claim SBD on $400,000 of ABI.
 AppleCo now has SCI of $100,000 and regular ABI of
$300,000  may claim SBD on $400,000 of ABI.
However, Minister has power to deem SCI to be another
amount it considers reasonable (could be $0).
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Anomalies and Considerations
● Direct or indirect interest, irrespective of votes
● Direct or “indirect” provision of service/property; yet BL assignment
for SCI purposes only available where the provision is ‘direct’.
● Clause B carve-out applies to services or property provided to a
“private corporation”
 a Canadian subsidiary of a widely-held company whose shares are
listed outside of Canada is considered a ‘private corporation’.
 Credit unions also ‘private corporation’.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Anomalies and Considerations
● For a partner to assign SPBL, it must have partnership income from
active business, i.e. partners of investment partnership cannot
assign SPBL to designated members actively providing services or
property to the partnership. No such issue with assignment of BL for
SCI purposes
● SPBL mismatch where partnership interest ≠ fee income %, e.g.
Doctor has 10% interest in a professional partnership, but his PC
charges fees to the partnership representing 20% of the
partnership’s profits.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Anomalies and Considerations
● Various anti-avoidance rule
 Minister’s power to determine SCI;
 Various rules prevents insertion of intermediary entity to
provide back-to-back arrangements, e.g.
 Income from such arrangement not protected by the
associated company exception;
 CCPC providing services to another corporation, but
inserted partnership in between  CCPC’s entitlement to
SPI potentially deem nil, harsh;
 Specific anti-avoidance where services/property provided
to a parent rather than the subsidiary [s.125(9)]
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
SBD Planning Going Forward
● Multiply SBD by
 restructuring into JV or cost sharing arrangement?
 Spinning out businesses to be owned by different arm’slength owners and use cross-charges?
Business considerations.
● Unwind existing SBD multiplication structures to simplify
them.
22
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
What Was Old s.55(2) Targeting
Ms. A wants to sell A Co to
Buyer. Ms. A will incur $200
capital gain (assume not QSBC)
S.85 Transfer
Ms. A
Ms. A
ACB: $0
FMV: $200
Classic
Capital Gain
Strip Plan:
A Co.
Cash $80
Business $120
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68th Annual Tax Conference
A Co dividend cash to Holdco
(Tax-free under s.112)
Ms. A
ACB: $0
FMV: $200
Holdco
ACB: $0
FMV: $200
ACB: $0
FMV: $200
Holdco
$80 Cash
ACB: $0
FMV: $120
A Co.
A Co.
Cash $80
Business $120
Business $120
Holdco then sells A
Co shares to buyer
for $120 incurring
capital gain of $120,
thereby delaying the
taxation of $80 gain
until taken out of
Holdco.
If $80 exceeds safe
income on hand,
subsection 55(2) will
re-characterise $80
as
proceeds
of
disposition.
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Brief Overview of New s.55(2)
Dividend
Corp.
Recipient
Dividend
Payor
Corp.
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68th Annual Tax Conference
Purpose/Result Tests:
● s.84(3) dividends  results in significant
reduction of capital gain
● Regular dividends  one of the purposes
of payment or receipt is to:
 Significantly reduce capital gain;
 Significantly reduce FMV of any share; or
 Significantly increase Recipient’s cost of
property.
High-low intercorporate stock dividend now
also caught.
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Brief Overview of New s.55(2)
Dividend
Corp.
Recipient
Dividend
Payor
Corp.
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68th Annual Tax Conference
Exceptions:
● S.55(3) – s.55(3)(a) related party exception
now only applies for s. 84(2)/(3) deemed
dividends on redemption, acquisition or
cancellation of a share.
● Part IV tax not refunded as consequence of
a dividend by a corporation as part of the
series
● Dividend not exceeding safe income on
hand contributing to hypothetical gain on
the share.
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Dealing with New s. 55(2.1) Purpose Tests
● No bright-line test; CRA, by necessity, makes inference
based on effect of the transactions and taxpayer has
burden to prove those were none of the purposes.
● What is “purpose and motivation behind the purpose”
 What does the taxpayer intend to accomplish with a
reduction in value?
 How would such reduction in value be beneficial to the
taxpayer?
 What actions did the taxpayer take in connection with the
reduction in value?
26
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Dealing with New s. 55(2.1) Purpose Tests
● Examples of dividends caught, per CRA:
 A dividend instrumental in creation of an accrued loss
on any share, or has potential to shelter gain on
some other property.
 A dividend that increase Recipient’s cost making it
possible to shelter a gain.
 A ‘lumpy’ dividend paid by an operating company to
its holding company for purpose of creditor proofing.
27
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Dealing with New s. 55(2.1) Purpose Tests
● Situations indicating purpose is absent, per CRA:
 Dividend paid pursuant to a ‘well-established policy’ of
paying regular dividends, and amount not exceed
‘reasonable dividend income return on equity on a
comparable listed share by a comparable payer
corporation in the same industry’.
 Dividend as part of in-house loss consolidation where any
ACB created is eliminated on the unwinding.
● CRA emphasized the above not safe harbours, always
necessary to examine purpose behind each dividend.
28
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Management of s.55(2) Risks
● Carefully scrutinize and document purpose.
● Avoid the purpose tests:
 Restructure inter-corporate repatriation into share
repurchases/redemptions to rely on narrowed s.55(3)(a);
 Rely on the safe income on hand (SIOH) exception;
 Reorganize structure to avoid inter-corporate dividends;
● Allow s.55(2) to apply for the capital dividend account
(CDA) and refundable dividend tax on hand (RDTOH)?
29
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Restructure Into Share Redemptions
● CRA will seek to apply the GAAR where taxpayers
attempt to artificially create or unduly preserve ACB by
relying on the s.55(3)(a) exception, for example:
 A note or other property (other than assets owned by the
dividend payer at the beginning of the series) received by
a dividend recipient as redemption proceeds exempt
under s.55(3)(a), and that is used by a person to generate
ACB that is significantly greater than the ACB of the
shares that were redeemed.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Restructure Into Share Redemptions
Holdco
Holdco
80
20
Subsidiary
55(3)(a)
should apply,
no GAAR.
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68th Annual Tax Conference
Partially redeem
for P-Note not
eliminated or
repaid at end of
series.
Partially redeem
shares for cash,
or transfer of
subsidiary
assets.
Subsidiary
55(3)(a) technically apply, but
CRA may apply GAAR where
Note is used to create ACB
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Rely on Safe Income On Hand Exception
● Reasonably considered to contribute to hypothetical
gain on the share, immediately before the dividend.
● CRA’s new approach compute global SIOH, then
allocate based on hypothetical gain of each share.
● Therefore, now key to determine FMV of share
immediately before the dividend.
 For participating shares, the CRA appears willing to take
into account the additional dividend the shareholder will
be entitled to receive immediately after that point in time.
However, CRA warns that the benefit provisions may
apply if dividends are disproportionate.
32
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Rely on Safe Income On Hand Exception
Holdco
C
Holdco
B
100 Class C
Subscription: $100,
on incorporation
100 Class B
Subscription: $100,
on incorporation
Holdco
A
100 Class A
Subscription: $50,000 in
Yr 8
Yr 10: $35,000
Dividend to
Holdco A
Opco.
Yr 8: safe income $70,000, FMV $50,000
Yr 10: safe income $90,000, FMV $170,300
All classes are voting commons.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Rely on Safe Income On Hand Exception
● The SIOH on Class A cannot exceed safe income earned after the
issuance of Class A shares to Holdco A. However, anything relating to
gains inside Opco accrued up to the date of issue of the Class A cannot be
included (because it is already reflected in the cost of the Class A shares).
 Maximum would be $20,000 [$90K - $70K], minus any portion relating to
realization of pre-subscription accrued gain.
● If the $35,000 dividend was part of the Class A shares’ FMV immediately
before the dividend:
 Class A Hypothetical FMV = $80,100 ([($170,300 - $35,000) / 3] + $35,000);
 Hypothetical gain immediately prior to dividend $30,100.
34
● Assuming that the entire $20,000 of SIOH contributes to the $30,100
hypothetical gain, s.55(5)(f) would deem $20,000 of the dividend to be a
separate dividend that falls within the safe income exception, and the
remainder ($15,000) to be another separate dividend that could potentially
be re-characterized into capital gain if one of the purpose tests is met.
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Summary of Changes
● Consultation announced in 2014 Budget
35
●
New Rules proposed in 2016 Budget, effective from
January 1, 2017
●
Repeal of Eligible Capital Property (ECP) Rules
●
New Class 14.1 depreciable property
●
Purpose is to simplify the rules
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Existing ECP Rules
● ¾ of cost of property added to CEC pool
● ¾ of proceeds deducted from CEC pool
● Annual deduction at 7% declining balance
● Negative balance included as business income at
effectively 50% inclusion rate and 75% for “recapture”
● 50% added to capital dividend account at company’s
year end (but not for recapture)
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
New Class 14.1 asset
● Normal rules for depreciable assets (i.e., recapture to
cost and capital gain on excess)
● Non-taxable portion of capital gain will increase CDA
balance
● 100% cost added to new Class 14.1 asset
● CCA at 5%
● Additional allowance for taxation years ending before
2027 at 2% of opening 2017 carryover UCC balance, at
a minimum of $500 but not exceeding the remaining
UCC balance
37
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Rules applicable to Class 14.1 asset
● Single goodwill property in respect of a business
● Any capital expenditures not relating to an identifiable
property acquired is deemed to be goodwill of the
business
● Any proceeds received for a “non-identifiable” property
is deemed proceeds of disposition of goodwill
● The taxpayer may designate the order if more than one
disposition
38
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset – Transitional Rules
39
● The capital cost is calculated as 4/3 x (Jan 1, 2017 CEC
balance + paragraph 20(1)(b) deductions – adjustments for
2016 dispositions for company with straddle year-end).
● The capital cost is designated to identifiable properties first
with the balance to goodwill.
● Deemed CCA claim equal to difference between capital cost
and CEC balance, hence UCC is essentially the CEC
balance.
● Addition to UCC balance at time of sale, if to arm’s length
parties to prevent excess recapture (generally 25% of the
lower of cost and proceeds).
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 1
● Mrs. Strawberry incorporated Strawberry Cake Company at a
cost of $2,000 on April 1, 2010.
● Strawberry Cake Company has a March 31 year end.
● Strawberry Cake Company carries on a cake business and
acquired a licence of unlimited duration on April 1, 2010 for
the secret recipe for strawberry delight cake for $50,000.
40
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 1 – cont’d
● Total additions to CEC pool is $39,000 (75% x [$50,000
+ $2,000])
● Total paragraph 20(1)(b) deductions for 5 years is
$13,767 ($13,237 in respect of the licence and $530 in
respect of the incorporation cost).
● The remaining CEC balance as of March 31, 2016 is
$25,233 ($24,262 in respect of the licence and $970 in
respect of the incorporation cost).
41
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
42
Class 14.1 Asset –Transitional Rules
Example 1 – cont’d
January 1, 2017
● Total capital cost of Class 14.1 asset = 4/3 x (25,233 +
13,767- 0) = $52,000.
● Designation:
 Licence - $50,000
 Goodwill - $2,000
● Deemed capital cost allowance claimed = $52,000 + 0 $25,233 = $26,767.
● UCC = $52,000 - $26,767 = $25,233.
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 1 – cont’d
● CCA at 5% plus additional 2% (min of $500) for taxation
years ending before 2027.
● 5% of UCC of $25,233 is equal to $1,262
● Additional 2% of UCC of $25,233 is equal to $504.
43
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 1 – cont’d
● Sale of licence for $120,000 in 2018.
● CCA claimed of $1,766 ($1,262 + $504) reducing the
UCC balance to $23,467.
● Capital gain of $70,000 ($120,000 - $50,000).
● Recapture = $23,467 + $12,500 (25% of $50,000) $50,000 = $14,033 which is the negative UCC balance.
44
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 2
● Same as Example 1 with the following additional facts.
● Strawberry Cake Company also acquired a customer list
on July 1, 2013 for $20,000.
● The customer list was sold on September 30, 2015 for
$40,000.
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68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 2 – cont’d
● Total additions to CEC pool is $54,000 (75% x [$50,000
+ $2,000 + $20,000]).
● The CEC pool is reduced by $30,000 ( 75% x $40,000)
for sale of customer list in the March 31, 2016 fiscal
year.
46
● Total paragraph 20(1)(b) deductions for 5 years is
$14,602.
● The remaining CEC balance as of March 31, 2016 is
$9,398.
68 Annual Tax Conference
Grace Chow and Kenneth Keung
th
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset –Transitional Rules
Example 2 – cont’d
● Total capital cost of Class 14.1 asset = 4/3 x ($9,398 +
$14,602- 0) = $32,000.
● Designation:
 Licence - $32,000
 Goodwill - nil
● Deemed capital cost allowance claimed = $32,000 + 0 $9,298 = $22,602.
● UCC = $32,000 - $22,602 = $9,398.
47
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP Regime
Example 2 – cont’d
● Sale of licence for $120,000.
● Assume no additional CCA claimed.
● Capital gain of $70,000 ($120,000 - $50,000).
● Recapture = $9,398 + $8,000 (25% of $32,000) $32,000 = $14,602.
48
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Class 14.1 Asset – Transitional Rules
● Special rules for Non-arm’s length transfers
● Adjustment to account for different CEC inclusion rate
pre 1988
● Special rules to preserve the exempt gain balance
49
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Planning
Should ECP be disposed of before December 31, 2016?
● Companies with a non-calendar year end straddling
January 1, 2017 will be deemed to have disposed of a
capital property with capital gain treatment but may elect
for business income treatment as applicable under
current rules.
● Addition at year-end to CDA also available for elected
business income treatment.
● Need to identify ECP owned by the company.
50
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Planning
Should ECP be disposed of before December 31, 2016?
● Need to sell business to trigger sale of goodwill.
● Lower corporate tax rate on active business income vs.
investment income for CCPC.
● Is prepayment of taxes worthwhile?
51
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
New ECP regime
Deduction of Incorporation Cost
● Expenses incurred for incorporation of a company of up
to $3,000 may be deducted as current expenses
● Amount exceeding $3,000 will be capitalized as a Class
14.1 asset
● Applicable to expenditures incurred after 2016
● Deduction only for incorporation expenses and not
expenses for corporate reorganization etc.
52
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
(Taxable Income
above $220,000)
Federal only
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
53
68th Annual Tax Conference
Ordinary Income
& Interest
33.00%
48.00%
47.70%
50.40%
53.30%
49.80%
47.05%
54.00%
44.50%
53.53%
51.37%
53.31%
48.00%
48.00%
Capital
Gains
16.50%
24.00%
23.85%
25.20%
26.65%
24.90%
23.53%
27.00%
22.25%
26.76%
25.69%
26.65%
24.00%
24.00%
Canadian Dividends
Eligible
Non-Eligible
24.81%
26.30%
31.71%
40.25%
31.30%
40.61%
37.78%
45.74%
34.20%
45.81%
40.54%
41.86%
28.33%
35.72%
41.58%
46.97%
33.08%
36.35%
39.34%
45.30%
34.22%
43.87%
39.83%
43.84%
30.33%
39.91%
24.81%
40.18%
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
Federal only
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
54
68th Annual Tax Conference
Small Business
Income
10.50%
13.50%
13.00%
10.50%
14.00%
13.50%
14.50%
13.50%
14.50%
15.00%
15.00%
18.50%
12.50%
13.50%
Active Business
Income
15.00%
27.00%
26.00%
27.00%
27.00%
30.00%
26.50%
31.00%
27.00%
26.50%
31.00%
26.90%
27.00%
30.00%
M&P
Income
15.00%
27.00%
26.00%
27.00%
27.00%
30.00%
26.50%
31.00%
27.00%
25.00%
31.00%
26.90%
25.00%
17.50%
Capital Gain
Investment Income
19.35%
25.35%
24.85%
25.35%
25.35%
26.85%
25.10%
27.35%
25.35%
25.10%
27.35%
25.30%
25.35%
26.85%
38.70%
50.70%
49.70%
50.70%
50.70%
53.70%
50.20%
54.70%
50.70%
50.20%
54.70%
50.60%
50.70%
53.70%
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
Planning Idea #1
● Defer taxes by leaving income in the corporation.
● Corporate tax rate ranges from 26% to 31%.
● Combined top personal tax rate ranges from 44.5% to
54%.
● Benefit of more than 20% from tax deferral.
● Need to consider impact on use of capital gains
exemption.
● Need to consider creditor proofing issues.
55
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
Planning Idea #2
● Income splitting more beneficial.
● Difference of 22% to 33.5% between lowest & top
personal tax rates.
● Need to consider Kiddie Tax.
● Need to consider Corporate Attribution rule under
section 74.4.
● Note exemption from 74.4 for SBC but company must
not have excess cash.
56
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
Planning Idea #3
● Capital gains more favoured.
● Strategies to trigger capital gain.
● Application of subsection 55(2).
● GAAR committee recommended that GAAR not apply.
● Realize capital gains on goodwill.
57
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
Canada’s High Tax Climate
Planning Idea #4
● Strategies to allow funds to be extracted from OPCO on
a tax deferred basis to avoid excess funds being
accumulated.
● Use of trust sandwich.
● Need to make sure companies are connected.
● Otherwise Part IV tax will apply.
58
68th Annual Tax Conference
Grace Chow and Kenneth Keung
Selected Issues
for Private Corporations
What’s Coming Down the Pipeline
59
68th Annual Tax Conference
Grace Chow and Kenneth Keung